Some bank customers got inside tips of impending failure

Not a surprise, but The Columbian confirms that some people got telephone calls warning them to take their money out of the about-to-fail Bank of Clark County, and some didn’t. And it’s legal!

Insider calling did occur. According to one contractor with $500,000 on deposit at the bank, he was alerted by a telephone tipster to get his money out of the bank two days in advance of the Jan. 16 closure. “Thank God,” he said, “or I wouldn’t now be in business.”

According to Federal Deposit Insurance Corp. documents, customers pulled an estimated $28 million out of Bank of Clark County as word got around that the bank was circling the drain.

Others weren’t so lucky to get the advance notice.

At least one retired senior is wondering when or if she will get back $160,000 in uninsured deposits with the bank.

So the bidness guys and gals made sure their buddies were warned. The hoi polloi who had deposits over the insurance limit, well, we’re sorry.

Let me emphasize that, according to The Columbian, this was all legal. Apparently bankers can go around tipping off their friends, no problem. Neat system we have.

And politicians wonder why people get up in arms. Maybe someone at that big domed thing in Olympia would like to look into all this? I know life isn’t always fair, but little old ladies losing their money while contractors get theirs just doesn’t seem right.

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The only solution to this problem is to fundamentally change the nature of some particular banking institutions. Risk in some ways is a direct function of liquidity. Make more stable institutions, but have strings attached. Make it legally impossible to draw down an entire account overnight or relatively quickly. In certain cases someone should not be able to draw out half a million in liquid assets, phone tip or no phone tip. Find this too draconian? Well then go live on a different part of the risk curve with your hedge fund buddies.

I have no problem with highly liquid, chaotic banks, but they need to be understood as a different animal than a bank where one keeps one retirement savings that have an expectation of low risk.

I think many might bristle at curtailing the liquidity of our financial institutions but I think that is the solution.

I hope that the Obama administration is able to get some of this through.

And yes, these guys who tipped off their pals should probably spend 20 to life in prison for their efforts. But the bottom line is that we need to have clearly demarcated expectation of risk in our institutions. And give the FDIC teeth to enforce it.

The FDIC may have to conjure a lot more money out of a clear blue sky than is presently provided for. If you look at the number of large banks that are already the institutional equivalent of a “dead man walking”–most likely already insolvent but hiding behind layers of flaky accounting–the funds presently reserved to cover the insured desposits in those institutions is but a small fraction of what may be required in a worst-case scenario. (Seems we’ve been seeing an awful lot of “worst cases” lately.)

Meanwhile, the FDIC is being pressed to take on ever more obligations (larger deposits, money-market funds, etc) with no apparent consideration for what monkey’s ass the money’s going to come out of.

A few years back, I worked for a small Seattle media company that was purchased by a British outfit whose ambitious CEO was out to create a “worldwide network” of similar businesses. On the face of it, the idea had some merit, but this man tried to take on too much, too fast–as the economy sank into post-911 paralysis. One day, representatives of his largest creditor (which happened to be the Royal Bank of Scotland) marched into his office, informed him that their accounting showed there was no way he could cover his debts, and gave him 30 minutes to gather his personal effects and leave the building. In Britain, and presumably in other countries as well, the rules of business governance are more specific than they are here–if you’re insolvent, whoever you owe the most to takes you over, plain and simple.

It seems that if that principle were applied to America’s largest banks, they’d already be taken over by the Federal government, representing, as it happens, the milllions of poor sots they’ve victimized. Their former leaders, instead of being chauffeured off to the Hamptons (or private-jetted to the South of France) would be looking for cold-water flats at best, or perhaps getting to know their new cellmates.

Regardless of whether this is “legal” under regulatory or criminal codes, it almost certainly was actionable fraud in the fiduciary relationship sense.

A banker sued by the little old lady probably won’t be able to convince a court that tipping off his buddies is a necessarily implied provision of his written job description. Thus, this was a personal tort, for which he is personally liable, and which can lead to a judgment that can be collected from his personal assets.

He also very likely will have a hard time coming up with anything in the fine print of the forms new customers sign that authorized the bank to create contractual relationships under which some customers are more equal than others. As clever as bank lawyers are, my guess is they didn’t insert any provision by which small customers agreed to let the bank move big customers to the head of the feeding line when the bank is about to fail. So, there is no way these phone calls were anything other than civil fraud.

I realize there’s no bank left to sue. But unless the guy(s) who made those phone calls are already in South America, there are ex-bankers to sue.

The little old lady doesn’t have to get her money back from the FDIC. This one will settle out of court. There’s no way the ex-bankers’ lawyers will let this case go to a jury. In fraud cases, you see, the damages the jury can award are not limited to the amount the victim was defrauded of.

Products sold to American consumers, including those from once-revered brand names, are crap. For example, I spent $250 this weekend to repair a 5-year-old fridge (not counting the spoiled food I threw out.) The repairman told me all refrigerators sold today are crap. Consumer products across the board have become so shoddy that overpriced extended warranties are starting to look like a good deal.

Our food supply isn’t safe. The FDA lets drug companies sell dangerous drugs. Recently, trying to keep a dangerous gasoline additive out of our drinking water – this ought to have been a no-brainer — provoked a major fight in Congress.

When Bush went to war in Iraq, our intel system didn’t work, and his military and diplomatic strategies didn’t work. When Hurricane Katrina devastated New Orleans, his emergency management agency didn’t work.

@19 ” you know inflation is just laying low building its strength, preparing for a raging battle”

That’s absolutely right, INFLATION is the dangerous gorilla lurking in the jungle, and it’s going to devastate retirees on fixed incomes. It’s going to provoke labor strife as workers demand COLAs and managements dig in. It’s going to set off another cycle of economic decline as household see their real incomes shrink further and cut back on their consumer spending even more.

This is looking more and more like a Weimar Republic scenario. So much money is being printed and fed into the black hole of credit derivatives that eventually this money, when it finds its way into the economy, will become worthless. Starbucks will go out of business because few people will be able to afford to pay $150 million for a latte. Ooops, that was the 9 AM price, now a latte costs $1.8 billion. Better get it now, because it’ll be $1 trillion by 7 PM.

Hyperinflation. Triple digit unemployment. GDP in free fall. Zero trade. The Dow Average in single digits. Yeah, I see that happening, because so far the government has thrown only $1 trillion into the black hole, and there are $596 trillion of credit derivatives out there, and the only way to destroy them is to buy them back, and the only way to get enough money to do that is to make money worthless.

The gun-toting survivalists who make up the rank-and-file of the Republican Party will get their wish. In a few more years, as Wall Street’s poison works its way through global economic systems, money will cease to have meaning and we will be living under a barter system in which food and bullets are used as currency.

“Credit default swaps have unique characteristics that distinguish them from insurance products and financial guaranties. The protection buyer does not need to own an underlying obligation of the reference entity. The protection buyer does not need to suffer a loss. The protection seller has no recourse to and no right to sue the reference entity for recovery.” — Wikipedia

(Quoted under fair use.)

Roger Rabbit Commentary: These concepts were more easily understood by ordinary Americans back when they were called “fraud” and were against the law.

BTW, that retired senior with at least three hundred and sixty large in one bank is actually very stupid (not to pile on, but). Come on, with the financial world collapsing around her for a year, she didn’t have the horse sense to transfer some of that to another bank? Ignorance is NOT bliss. It’s expensive.

So the retired senior will get her’s back, though I don’t envy her having to slog through that (FDIC) process.

My husband and I had a big (but still under the limit) CD is IndyMac bank. When the bank went belly-up, there was no slogging at all. We got a letter that said our money was now in IndyMac Federal Bank. The new bank contintued to pay the interest into another bank and everything went on like it used to. If we hadn’t been reading the newspaper, we might not even have noticed the slightly new letterhead on our statements.

It’s not that bad Mr. Bunny. The top 1% have enough money laying around to add all the stimulus we need. They wouldn’t even miss a few billion they practically stole. Their supporting of the Bush’s of this world should now cost them their ill gotten gains. Spread the wealth.

In taxes.

And all those corporations moving to the Cayman Islands? Tax fraud. Pay the taxes with interest and penalties. They then wouldn’t have enough to pay their execs their 18 billion in “bonuses”…. Ahhhh…. Too bad…

Let’s just ask. When will government work for the people, and not just the top 1%?

While it’s true that both the the FDIC and NCUA now cover up to $250,000 on deposit – most people don’t realize that they can structure their accounts (via joint owners and beneficiaries) at one institution in such a way that they can get up to 2.5 million in insurance coverage. So, if you’re idiot enough to have $500,000 just sitting in a goddamn savings account without finding out more on how you’re going to protect it, then I think you deserve to lose it.

@30…you’d think it part of that old customer service sentiment for an officer of the bank to alert their customers to the risk they face, and how easy it would be to protect it, no?. And not at the last minute when Uncle Sam is stepping in.

Anyway, alerting only a select few special customers to impending disaster smells bad. Even if it isn’t illegal. It stinks.

@25 She probably doesn’t know how to fix cars, either. Let’s face it, the world has gotten so complex that most of us are suffering from information overload, and don’t have enough time and energy to do things the “right” way. I probably wouldn’t let myself accumulate more than $250,000 in any one bank, because I’m a lawyer who sees the world in terms of what can go wrong, because lawyers make their livings off what does go wrong, but then I’ve never had to worry about that because I’ve never had $250,000. Not in cash, anyway. What probably happen is she started out within the insured limits and let the interest compound for many years. Stock portfolios become unbalanced that way, too. It’s called “running on autopilot.” Most people are too busy not to run on autopilot. There’s just too many demands on our time, energy, and intellect to pay attention to everything we should pay attention to. So, blaming the customer isn’t going to cut it here. Anyway, the point is not that she stupidly failed to spread her cash around financial institutions to stay within the FDIC insurance limits. The point is that, having failed to do so, she was defrauded of her rightful place in line for getting back at least some of the uninsured portion of her deposits by those insider calls — and she ought to sue both the bankers who made those calls and the developers who benefitted from them. The fact she was negligent doesn’t make their fraudulent actions innocent. And even if you don’t want to believe it was fraud, it was, at a minimum, breach of fiduciary duty. This is legally actionable.

@30 I’m tired of smart alecks excusing fraud by calling victims “idiots.” Banks have fiduciary duties to their customers. Let’s enforce them instead of punishing customers for not assuming their bankers are crooks. If regulators won’t enforce those duties, then tort lawyers should.

Apparently the Justice Department is convening a grand jury to indict the Archdiocese of Los Angeles for criminal fraud simply because they fostered the assumption by families that their children involved in church activities were in an environment safe from…oh, things like sexual assault.

Couldn’t the same reasoning be applied to banks having led their customers to believe that letting them take care of their money was more prudent than leaving it on a park bench and walking away?

@1 The goal isn’t to dumb everyone down to the stupidest person in the crowd, which is what your proposal does.

Most folks have more than a dozen brain cells, so let’s make the risks clear. Obvious example: banks w/with more than $250k in assets from the same individual (SSN) send a postal notice every 6 months, on its own, stating clearly the uninsured loss exposure. Could even be a standard, simple form.

Voila: people can make informed decisions, and we haven’t standardized on the dumbest, most ignorant, laziest common denominator in the process.

@39 Not bad. If auto dealers can mail postcards to their customers reminding them it’s time for a service check, and dentists can mail postcards to their patients reminding them it’s time to schedule a cleaning, why can’t banks mail postcards to their customers reminding them that their deposits exceed insured limits?

@ 31 & 36 – When you alert your customers/members to a financial failure as large as an institution “going down” then you cause large scale panic. I realize that there is something wrong with this whole story from the beginning, but my point was that there is A LOT more financial protection for your funds that they openly try and tell you about! Your financial institution can help you structure your accounts so that your money is covered if some BS like this even happens – People with LARGE sums of money should probably take a few steps to find out more so that they don’t lose their asses.

You’re also assuming that every employee knows when something bad is about to happen, which may not be the case. If a CEO/mgmt make a poor decision not to tell their members/customers about a crash, you cannot blame all the employees under them for not saying anything.

When a financial institution fails, the majority of the time another one swoops in a takes over…so no one is actually OUT their money anyway. Now, if they run to the bank and try to do a withdrawal of all the funds on the day the crash is announced, of course they’re going to be up shit creek – but if they’re patient…then it’s doubtful they’ll be out anything.

@41 You misunderstand the issue. It isn’t whether banks should tell their customers they’re about to fail. It’s telling some customers and not others, giving the favored customers a chance to save their money at the expense of the less favored customers. It’s equivalent to insider trading on the stock market, which is illegal. What happened at Clark County Bank may not be illegal because it’s a bank and not a publicly traded company whose stock shares are involved, but it’s sure as hell tortious.

More or less I agree with what you’re saying. But, on the other hand most people don’t understand happens when they hear about a financial institution failing so if a bank or credit union announces their failure you’re going to have a huge panic on your hands. Regardless of whether or not they tell their customer/members, it’s still a painful process, but panic doesn’t help the situation when it happens.

Just read the linked story. It said nothing about people at the bank making “sure their buddies were warned,” and them “tipping off their friends,” as John claims happened. It just says some people were notified. There is no evidence presented in the original story that friends were tipped off.

If I’ve taught you comment section sheep nothing else, it’s to DO YOUR HOMEWORK when reading these posts!

@43 You still don’t understand what I’m saying. I’m not saying banks should announce impending failure. I’m saying bankers can’t give this information to some of their customers without breaching their fiduciary responsibilites to the rest of their customers.

What happens is the alerted customers withdraw all of their uninsured funds, leaving less money in the bank to divide among the other customers with uninsured deposits, to their detriment. When inside information results in someone gaining at someone else’s expense, fraud has been committed. The bank also breaches its fiduciary duty to the customers who didn’t get the information and had their recovery of their uninsured deposits impaired as a result.

Some people got called – and 28 million was tken out of the bank just before it collapsed. Some people did not get called – and they lost money.

A check with state banking officials and with the FDIC in Washington D.C., found that no laws were broken by those who made calls to certain bank clients. It does present something of a moral dilemma, in that some clients were warned and escaped unscathed ahead of bank regulators, while others did not.

The article is very clear that those are the facts. The next question an intelligent reporter asks would be:

Who got called and who did not and why?

That is exactly what John is basically asking. Who had the connections to get called and who did not? Was the calling random? That would be very doubtful. Maybe John is exaggerating a bit, but the facts are that selected people got notice and others did not.

@50 Yes, this seems a perfect time to rehabilitate lynching. The original concept wasn’t all that bad, just misapplied — it got a bad rap because they lynched blacks instead of bankers and each other.*

56 Roger understands a lot of stuff because that is (or until he retired, was) his job. That’s what lawyers do. From all credible accounts, he is/was good at it.

At one time in the past, his job was killing people and breaking things, and he was probably pretty damned good at that, too.

Some people are physicians. They’re good at figuring out why someone’s sick and making them better. If you’re sick, you go to a doctor, because if you went to, say, a florist, the florist’s skill set might not enable her to do a very good job of fixing what’s wrong with you.

Banks used to be run by people who were good at….(get ready for this, now)…banking. Seems most people running banks aren’t very good at it any more. That would suggest it’s about time somebody else ran the banks.

For the last eight years, our government was run by a bunch of people who weren’t very good at it. The voting public finally came to realize that. That’s why a different crew’s in charge now.

Puddy, just what, if anything, are you good at? Most evidence available here seems to point to not one hell of a lot.

I’m the one who fact checks Pelletizer’s worthles tripe and gives everyone the URLs. Hey I found the Baird one. Glad you found more.

Did you look at who came from the OCT to lead the National Endowment for the “Arts”? He chose to allow funding for “The Perfect Moment” and “Piss Christ” to run instead of canceling them. And he ran as an “independent” against a Republican senator. Look up that vile “art”.

Fact check PTBAA unless of course you like looking at pictures with a bullwhip lodged in a certain cavity. Well you are PTBA ASS!

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